Successfully reported this slideshow.

Business model innovation

22

Share

Upcoming SlideShare
Zero to 50m
Zero to 50m
Loading in …3
×
1 of 79
1 of 79

Business model innovation

22

Share

Download to read offline

Unlike the past where technology innovation was the primary driver of startup creation, in the last ten years, it has frequently been innovation in new business models that has caused the disruption to create the opening for new companies. This presentation by David Skok of Matrix Partners looks in depth at the key business model changes that are causing disruption in the B2B space.

Unlike the past where technology innovation was the primary driver of startup creation, in the last ten years, it has frequently been innovation in new business models that has caused the disruption to create the opening for new companies. This presentation by David Skok of Matrix Partners looks in depth at the key business model changes that are causing disruption in the B2B space.

More Related Content

Related Books

Free with a 14 day trial from Scribd

See all

Business model innovation

  1. 2. Agenda <ul><li>Business Model Innovation </li></ul><ul><ul><li>CAC and LTV </li></ul></ul><ul><li>The SaaS/Recurring revenue business model </li></ul><ul><li>Reducing CAC (Cost to Acquire a Customer) </li></ul><ul><ul><li>The new rules of Customer Acquisition </li></ul></ul><ul><li>Increasing LTV (Lifetime Value of a Customer) </li></ul><ul><li>Conclusion: Lessons Learned </li></ul>
  2. 3. Anatomy of a Startup The Old Model Unmet Need New Technology
  3. 4. The New Model Consumer Technology leads the Enterprise Unmet Need New Technology Entertainment New Business Models
  4. 5. Business Model Innovation: The Major Change Agents The Internet Web 2.0 Social Networks Mobile Web Google SEO/SEM Enables low-cost customer acquisition
  5. 6. B2C Breakthrough Companies <ul><li>The Fastest Growing Companies ever: </li></ul><ul><ul><li>Zynga </li></ul></ul><ul><ul><li>Groupon </li></ul></ul><ul><ul><li>Gilt </li></ul></ul><ul><li>All use Social and Viral techniques for customer acquisition </li></ul>
  6. 7. The Key Elements behind “Business Model” <ul><li>Web-based companies make this abundantly clear: </li></ul><ul><li>Spend some money to drive traffic to your web site </li></ul><ul><li>Come up with a Monetization strategy </li></ul><ul><ul><li>Transactions </li></ul></ul><ul><ul><li>Subscriptions </li></ul></ul><ul><ul><li>Ads </li></ul></ul><ul><ul><li>Virtual Goods </li></ul></ul><ul><ul><li>Etc. </li></ul></ul>
  7. 8. The Key Elements behind “Business Model” <ul><li>Cost to Acquire the Customer (CAC) </li></ul><ul><li>Profit from that Customer </li></ul><ul><ul><li>For subscription revenue businesses = the value of that customer over their lifetime (LTV) </li></ul></ul><ul><ul><li>This number takes into account the COGS or cost to serve </li></ul></ul><ul><ul><li>Startup Killer </li></ul></ul><ul><li>There is a common problem: </li></ul>
  8. 9. An out of balance Business Model Monetization (LTV) Cost to Acquire a Customer (CAC) Entrepreneurs are over-optimistic
  9. 10. CAC for a Web driven business
  10. 11. CAC for a Direct Salesforce Annual numbers
  11. 12. What we are looking for Monetization (LTV) Cost to Acquire a Customer (CAC) A well balanced business model
  12. 13. The Balancing Act Monetization (LTV) Cost to Acquire a Customer CAC) <ul><li>Viral effects </li></ul><ul><li>Inbound Marketing </li></ul><ul><li>Free or Freemium </li></ul><ul><li>Open Source </li></ul><ul><li>Free Trials </li></ul><ul><li>Touchless conversion </li></ul><ul><li>Inside Sales </li></ul><ul><li>Channels </li></ul><ul><li>Strategic partnerships </li></ul><ul><li>Field Sales </li></ul><ul><li>Outbound Marketing </li></ul><ul><li>Recurring Revenue </li></ul><ul><li>Scalable Pricing </li></ul><ul><li>Cross Sell/Upsell </li></ul><ul><li>Product line expansion </li></ul><ul><li>Lead Gen for 3 rd parties </li></ul><ul><li>High Churn Rates </li></ul><ul><li>Low customer satisfaction </li></ul>
  13. 14. Business Model Disruption in B2B <ul><li>Open Source </li></ul><ul><ul><li>Use Free Software to acquire customers cheaply </li></ul></ul><ul><ul><ul><li>When done right, free creates viral spread </li></ul></ul></ul><ul><ul><li>Monetize a portion of the free customer base </li></ul></ul>
  14. 15. Business Model Disruption in B2B <ul><li>SaaS </li></ul><ul><ul><li>Rent software to customers monthly </li></ul></ul><ul><ul><li>Remove complexity (no IT) </li></ul></ul><ul><ul><li>Lower buying barriers </li></ul></ul><ul><ul><ul><li>No big $ purchase decision </li></ul></ul></ul><ul><ul><ul><li>Easy to cancel if not working </li></ul></ul></ul><ul><ul><ul><li>No IT means that the business buyer can purchase </li></ul></ul></ul>
  15. 16. Business Model Disruption in B2B <ul><li>The Low Cost Sales Model </li></ul><ul><li>The Touch-less Conversion </li></ul><ul><li>Freemium </li></ul>
  16. 18. Recurring Revenue <ul><li>One Salesperson </li></ul><ul><ul><li>Selling 5 Customers a month @ $1000 per month each </li></ul></ul><ul><ul><li>Means an additional $5,000 in new additive revenue every month </li></ul></ul>Turbocharger: Adding Salespeople increases monthly new bookings
  17. 19. Churn <ul><li>Churn Rate plays a huge role in success </li></ul><ul><li>1% to 2.5% churn per month is acceptable </li></ul><ul><li>Higher than that, you are filling a leaky bucket </li></ul><ul><ul><li>Need to understand why you have low customer satisfaction and address the problem </li></ul></ul>
  18. 20. How Churn affects LTV <ul><li>Customer lifetime in months = 1 / Monthly Churn </li></ul><ul><ul><li>Churn of 1% = 100 months lifetime </li></ul></ul><ul><ul><li>Churn of 2% = 50 months lifetime </li></ul></ul><ul><ul><li>Churn of 5% = 20 months lifetime </li></ul></ul><ul><li>Impact on LTV for $1,000 average subscription </li></ul><ul><ul><li>Churn of 1% = $100,000 LTV </li></ul></ul><ul><ul><li>Churn of 2% = $50,000 LTV </li></ul></ul><ul><ul><li>Churn of 5% = $20,000 LTV </li></ul></ul>
  19. 21. The Big Issue with SaaS <ul><li>Investments to acquire customers are all upfront </li></ul><ul><li>Revenue from each customer comes in slowly </li></ul><ul><li>Creates a cash flow problem in the early days </li></ul><ul><li>But once through the valley of death, cash flow is amazing </li></ul>
  20. 22. My rules for CAC/LTV balance in a SaaS model > 3x LTV CAC Months to recover CAC < 12 months <ul><ul><li>Required for Capital Efficiency </li></ul></ul>
  21. 23. Another key SaaS benefit <ul><li>Rapid development </li></ul><ul><ul><li>Only one version of your code base at all customers </li></ul></ul><ul><li>Rapid customer feedback on new features </li></ul><ul><li>Immediate deployment of new features to all customers </li></ul>
  22. 24. Other Recurring Revenue Benefits <ul><li>Predictability </li></ul><ul><ul><li>Highly valued by Wall St </li></ul></ul><ul><li>Future revenue and cash flow for an acquirer </li></ul>
  23. 26. Buying Behavior has Changed <ul><li>“ Please understand that I get dozens of these types of messages a week.  I simply do not have time to read them, dig into them, follow-up on them, or reply to them.  The most effective solution to this problem is for me to ignore the messages, which is what I usually do.  … </li></ul><ul><li>…  Finally, a small comment.  As a customer, I find this type of approach to sales to be largely annoying to me and unproductive for you.  We learn far more about what we want to purchase by searching the web, looking for customer references in blogs and forums, word of mouth, and by finding white papers on your site that concretely describe solutions to problems we are having.” </li></ul>CIO of Large Pharma Co.
  24. 27. Buying Behavior has Changed <ul><li>Outbound Marketing: </li></ul><ul><ul><li>Annoying to your customers </li></ul></ul><ul><ul><li>Expensive </li></ul></ul><ul><ul><li>Increasingly less effective </li></ul></ul><ul><li>What is the new process? </li></ul><ul><ul><li>Google Search </li></ul></ul><ul><ul><li>Web Site </li></ul></ul><ul><ul><li>Reviews </li></ul></ul><ul><ul><li>Blogs & Social Media </li></ul></ul><ul><ul><ul><li>Influencers </li></ul></ul></ul><ul><ul><li>Trials or Free software / services </li></ul></ul><ul><ul><li>Avoid sales people </li></ul></ul><ul><li>Requires Inbound Marketing thought processes </li></ul>
  25. 28. HubSpot: Inbound Marketing
  26. 29. Remarkable Content <ul><li>Write a Blog </li></ul><ul><li>Create content that is REMARKable </li></ul><ul><ul><li>Educational </li></ul></ul><ul><ul><li>Humorous </li></ul></ul><ul><ul><li>Controversial </li></ul></ul><ul><li>Optimize that content for Search </li></ul><ul><ul><li>Keywords used by your buyers </li></ul></ul><ul><li>Use social media (Twitter, Facebook, etc) to build a following </li></ul><ul><ul><li>If the content is good it will spread virally </li></ul></ul>
  27. 30. A Crucial Insight <ul><li>Never sell or promote your product in your blog </li></ul><ul><li>Instead Educate and Entertain </li></ul><ul><ul><li>Focus on the areas of greatest interest to your buyers </li></ul></ul>
  28. 31. The Power of Free <ul><li>Wired Magazine: Free! Why $0.00 Is the Future of Business </li></ul><ul><ul><li>Free is dramatically different to even $1 </li></ul></ul><ul><ul><li>If done right can lead to viral spread </li></ul></ul><ul><li>Examples: </li></ul><ul><ul><li>Open Source software (JBoss, Asterisk) </li></ul></ul><ul><ul><li>HubSpot’s WebSiteGrader </li></ul></ul><ul><li>Monetize some portion of your free customer base </li></ul><ul><ul><li>Use of a free product/service develops a level of trusted relationship </li></ul></ul><ul><ul><li>Makes it easier to sell something to them </li></ul></ul>
  29. 34. <ul><li>Using Engineering for Marketing </li></ul>
  30. 35. Freemium <ul><li>Dropbox Example </li></ul><ul><ul><li>Get you hooked for free </li></ul></ul><ul><ul><li>Storage slowly increases to the point where you need to pay </li></ul></ul><ul><ul><li>But by then they have established trust </li></ul></ul><ul><ul><ul><li>And it is hard to move your data that is shared with others </li></ul></ul></ul>
  31. 36. Virality <ul><li>Often hoped for, rarely achieved </li></ul><ul><li>The best businesses: </li></ul><ul><ul><li>Virality plus Monetization </li></ul></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><li>Google </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Gilt.com </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Zynga </li></ul></ul></ul></ul><ul><li>Entire Blog post devoted to this topic: </li></ul><ul><ul><li>w ww.forentrepreneurs.com/lessons-learnt-viral-marketing/ </li></ul></ul>
  32. 37. Old World evolving to a New World Charge for everything (including on-site trials) Free Trials Free Product Monetize a Fraction of Custs
  33. 38. Old World evolving to a New World <ul><li>New World </li></ul><ul><ul><li>Give things away to optimize spread </li></ul></ul><ul><ul><li>Large Footprint of customers = Great brand value </li></ul></ul><ul><ul><li>Price low to get fast decisions </li></ul></ul><ul><li>Old world </li></ul><ul><ul><li>Optimize pricing to extract the most </li></ul></ul><ul><ul><li>“ But the customer is quite happy to pay that much” </li></ul></ul><ul><li>Key realization </li></ul><ul><ul><li>CAC is one of the highest P&L expense items </li></ul></ul><ul><ul><li>Optimal Pricing limits spread </li></ul></ul><ul><ul><li>Optimal Pricing damages CAC </li></ul></ul>
  34. 39. The Low Cost Sales Model <ul><li>Web & Inbound Marketing </li></ul><ul><ul><li>Free product, or Free Trial </li></ul></ul><ul><li>Insides Sales </li></ul><ul><li>Examples </li></ul><ul><ul><li>SolarWinds </li></ul></ul><ul><ul><li>Constant Contact </li></ul></ul><ul><ul><li>LogMeIn </li></ul></ul><ul><ul><li>JBoss </li></ul></ul><ul><ul><li>HubSpot </li></ul></ul>
  35. 40. The Touchless Conversion <ul><li>ZenDesk </li></ul><ul><li>Common Funnel Metrics: </li></ul><ul><ul><li>10% of visitors do a trial </li></ul></ul><ul><ul><li>20% of trials convert to paid </li></ul></ul><ul><li>Extraordinarily scalable </li></ul><ul><li>Extremely low cost </li></ul>
  36. 41. Free Trials require different Product Thinking <ul><li>The product is your salesperson </li></ul><ul><li>Extreme focus on: </li></ul><ul><ul><li>Ease of installation </li></ul></ul><ul><ul><li>Ease of use </li></ul></ul><ul><ul><li>Clear instructions on how to test (short videos, etc.) </li></ul></ul><ul><ul><li>Fast proof that it works </li></ul></ul>
  37. 42. Enables you to reach the SMB market <ul><li>Not economically feasible in the past </li></ul><ul><li>Now opens up a vast new market </li></ul><ul><li>In many ways a better business than Enterprise Software </li></ul>
  38. 43. Need to Build a Sales & Marketing Machine <ul><li>Automated </li></ul><ul><ul><li>Top of the Funnel </li></ul></ul><ul><ul><li>Middle of the Funnel (lead nurturing) </li></ul></ul><ul><ul><li>CRM </li></ul></ul><ul><li>Scalable </li></ul><ul><li>Instrumented </li></ul><ul><li>Clear understanding of Costs and Returns </li></ul>
  39. 44. Metrics are crucial for success Visitors Trials Campaigns to drive traffic Closed Deals Overall Conversion % (by lead source) Conversion % Conversion %
  40. 45. Experimentation and A/B Testing <ul><li>Constant Experimentation </li></ul><ul><ul><li>New Lead Sources </li></ul></ul><ul><ul><li>New Messaging </li></ul></ul><ul><ul><li>New Pricing </li></ul></ul><ul><ul><li>New Product Features </li></ul></ul><ul><li>A/B Testing immediately reveals what is working </li></ul>
  41. 47. Sales Complexity
  42. 48. How I assumed the two would relate
  43. 49. A rough estimate of CAC versus Sales Complexity Rough Estimates of Cost of Customer Acquisition (CAC)
  44. 50. The relationship is roughly exponential Clearly adding Human Touch dramatically increases costs
  45. 51. Sales Complexity CAC (logarithmic) 10x 10x 10x
  46. 52. High CAC requires higher pricing <ul><li>Higher pricing unfortunately leads to greater approval complexity </li></ul><ul><li>To get deals through requires high scores: </li></ul><ul><ul><li>Product value </li></ul></ul><ul><ul><li>Customer Pain </li></ul></ul><ul><ul><li>Urgency to get something done </li></ul></ul>
  47. 53. High CAC, requires high scores for : Value, Pain, Urgency Sales Complexity  Value / Pain / Urgency = LTV (logarithmic)
  48. 54. Sales Complexity  Value / Pain / Urgency = LTV (logarithmic) Unprofitable: LTV < CAC
  49. 55. Sales Complexity  Blue Zone 1 Blue Zone 2 Value / Pain / Urgency = LTV (logarithmic) Red Zone 1 Red Zone 2
  50. 56. Sales Complexity  Amber Zone 2 Amber Zone 1 Value / Pain / Urgency = LTV (logarithmic)
  51. 57. Sales Complexity  Green Zone 1 Green Zone 2 Green Zone 3 Value / Pain / Urgency = LTV (logarithmic)
  52. 58. How SaaS changes Sales Complexity Sales Complexity  Value / Pain / Urgency = LTV (logarithmic)
  53. 59. Levers you can use to move from Red to Green <ul><li>Make it easy for customers to sell themselves </li></ul><ul><li>Make the first decision to work with your product easy </li></ul><ul><ul><li>Simple product </li></ul></ul><ul><ul><li>Free versions, Free Trials, Open Source </li></ul></ul><ul><li>Remove Complexity from closing the Sale </li></ul><ul><ul><li>Remove IT (SaaS) </li></ul></ul><ul><ul><li>Eliminate committee decision making </li></ul></ul><ul><li>Make the first financial commitment easy </li></ul><ul><ul><li>$10,000 or below for enterprise sales </li></ul></ul><ul><ul><li>$250 per month for very small business SaaS </li></ul></ul>
  54. 61. Sales Complexity  Able to leverage the Internet revolution Human Costs dominate: Old world business model Value/Pain/Urgency
  55. 62. What can happen when you get this right <ul><li>SolarWinds </li></ul><ul><ul><li>2009 Revenues: $116 million </li></ul></ul><ul><ul><li>EBITDA: $60 million </li></ul></ul><ul><li>Others: JBoss, LogMeIn, Constant Contact, Salesforce.com, etc. </li></ul>52% operating margins
  56. 64. The Balancing Act Monetization (LTV) Cost to Acquire a Customer CAC) <ul><li>Viral effects </li></ul><ul><li>Inbound Marketing </li></ul><ul><li>Free or Freemium </li></ul><ul><li>Open Source </li></ul><ul><li>Free Trials </li></ul><ul><li>Touchless conversion </li></ul><ul><li>Inside Sales </li></ul><ul><li>Channels </li></ul><ul><li>Strategic partnerships </li></ul><ul><li>Field Sales </li></ul><ul><li>Outbound Marketing </li></ul><ul><li>Recurring Revenue </li></ul><ul><li>Scalable Pricing </li></ul><ul><li>Cross Sell/Upsell </li></ul><ul><li>Product line expansion </li></ul><ul><li>Lead Gen for 3 rd parties </li></ul><ul><li>High Churn Rates </li></ul><ul><li>Low customer satisfaction </li></ul>
  57. 66. The Highlights <ul><li>Breakthrough Business Model </li></ul><ul><ul><li>Open Source </li></ul></ul><ul><ul><li>A great example of the power of Free </li></ul></ul><ul><ul><li>5 million downloads </li></ul></ul><ul><li>The first challenge: How to monetize </li></ul><ul><li>The second challenge: Conversion </li></ul><ul><ul><li>While keeping CAC low </li></ul></ul><ul><ul><li>Solution: Build a Sales & Marketing Machine </li></ul></ul>
  58. 67. The Original Brainstorming Session
  59. 68. The First Blockage Point <ul><li>5 million users had downloaded JBoss </li></ul><ul><ul><li>But none had given their names </li></ul></ul><ul><li>The problem: </li></ul><ul><ul><li>email registration in front of download reduces conversion rates significantly </li></ul></ul><ul><li>The Solution </li></ul><ul><ul><li>Look for something that those developers really wanted </li></ul></ul><ul><li>JBoss had been earning $27k per month for documentation </li></ul><ul><ul><li>Solution: give this away, in exchange for email address </li></ul></ul>
  60. 69. JBoss - Sales & Marketing Machine Enterprise Rollouts Suspects Closed Deals Phone Call Lead Nurturing Inside Sales Web Leads Web Scoring
  61. 70. Metrics: The End Goal Web activity scoring Tele- marketing Tele- sales
  62. 71. Using the model to work backwards <ul><li>To do $4m in the month: </li></ul><ul><ul><li>If Average Deal Size is $10k </li></ul></ul><ul><ul><li>Need $4m divided by $10k deals to reach target = 400 deals </li></ul></ul><ul><ul><li>Means 1,200 deals being worked in Inside sales (400x4) </li></ul></ul><ul><ul><ul><li>Know that each rep can work 60 deals at a time, means 20 reps </li></ul></ul></ul><ul><ul><li>Means 3,600 telemarketing contacts (1,200x3) </li></ul></ul><ul><ul><li>Means 14,400 Raw Leads (3,600x4) </li></ul></ul>Web activity scoring Tele- marketing Inside- sales
  63. 72. The next challenge: Increase LTV <ul><li>Multi-pronged approach </li></ul><ul><ul><li>Add services to the subscription (beyond just support) </li></ul></ul><ul><ul><ul><li>Key service was JBoss Operations Network </li></ul></ul></ul><ul><ul><li>Broaden the product line and upsell </li></ul></ul><ul><ul><ul><li>JBoss Enteprise Middleware Suite (JEMS) </li></ul></ul></ul><ul><ul><li>Scalable Pricing </li></ul></ul><ul><ul><ul><li>4 axes to drive pricing higher </li></ul></ul></ul><ul><li>Result </li></ul><ul><ul><li>Drove average deal size from $10k to $50k </li></ul></ul><ul><ul><li>While maintaining the same pipeline flow and conversion rates </li></ul></ul>
  64. 73. The Results <ul><li>Before venture financing </li></ul><ul><ul><li>2003 $2m </li></ul></ul><ul><li>Early 2004 – venture round closes </li></ul><ul><li>Revenue Growth: </li></ul><ul><ul><li>2004 $11m </li></ul></ul><ul><ul><li>2005 $26m </li></ul></ul><ul><ul><li>2006 on plan to do $65m </li></ul></ul>
  65. 74. JBoss Summary <ul><li>Business Model disruption </li></ul><ul><ul><li>Gave the product away entirely free </li></ul></ul><ul><ul><li>Monetized support & management </li></ul></ul><ul><li>Low CAC </li></ul><ul><ul><li>Leveraged free and virality to acquire non-paying customers </li></ul></ul><ul><li>Sales & Marketing Machine </li></ul><ul><ul><li>Careful study of customer motivations </li></ul></ul><ul><ul><li>Low cost Sales model </li></ul></ul><ul><ul><li>Excellent Metrics </li></ul></ul><ul><li>Scalable pricing model </li></ul>
  66. 76. Lessons Learned <ul><li>Business Model Innovation </li></ul><ul><ul><li>The new trigger for startups </li></ul></ul><ul><li>Understand the CAC / LTV balance </li></ul><ul><ul><li>Look for the breakthrough techniques for acquiring customers </li></ul></ul><ul><ul><ul><li>Free products / services </li></ul></ul></ul><ul><ul><ul><ul><li>Use R&D as a marketing tool </li></ul></ul></ul></ul><ul><ul><ul><li>Free Trials </li></ul></ul></ul><ul><ul><ul><li>Viral </li></ul></ul></ul><ul><ul><ul><li>Social </li></ul></ul></ul><ul><ul><ul><li>Etc. </li></ul></ul></ul>
  67. 77. Lessons Learned - (continued) <ul><li>Understand the new buying behaviors </li></ul><ul><ul><li>Think Inbound versus Outbound </li></ul></ul><ul><li>Build a Sales & Marketing Machine </li></ul><ul><li>Look for the breakthrough techniques </li></ul><ul><li>Look for the next evolution in the business model </li></ul>
  68. 78. This is all obvious <ul><li>Vision is easy </li></ul><ul><li>Execution is the hard part </li></ul><ul><li>All comes down to hiring great teams </li></ul>
  69. 79. For More information <ul><li>Visit my blog at www.forEntrepreneurs.com </li></ul>

×